A merger or sale could be a major milestone for a business. It can also result in serious problems. These include legal liabilities, financial losses and reputational damage. In the end, it’s important that companies take the time to carefully assess any new business venture with an extensive due diligence process.
The risk factors that are discovered in due diligence are dependent on the nature of the business and nature of the customer. A bank or financial institution for instance, may require a higher level of due diligence than retail stores or ecommerce companies. Similar to a company that has an international presence may need to examine the laws specific to its country that affect its operations more than a local, domestic customer.
A major risk factor companies read this must look out for is if the customer is on a list of sanctions. This is an essential check which should be done prior to any contract is signed, particularly in cases where the customer could be found to be involved in illegal acts such as fraud or bribery.
In a due diligence process it is crucial to take into account the amount of dependence on specific people or entities. For instance, a dependence on the owner-manager or key employees of a business might be an indication that it could lead to unexpected loss in the event that they suddenly leave the company. The amount of shares held by the top management is also an important factor to take into consideration. A high percentage is a positive sign, while an absence of shares is a sign of danger.